Tuesday, March 31, 2009

Yesterday's Market Round-up

As expected (though for some it is "as feared"), the market dropped significantly yesterday.
  • Dow Jones Index - drop 3.27%
  • S&P500 Index - drop 3.48%
  • Nasdaq Composite Index - 2.81%

Will the drop continues? Technically, it should be likely. For now, I am riding on the wave downwards. Wheeeeeeeeeee !!!!!!

Cheers !

PersianCat (Millionaire-in-progress)

Monday, March 30, 2009

Asian Markets is down - So Will The U.S. ?

The U.S. markets (so are the world markets) had been having a very good run since 6 March 2009. The expected continuation of downtrend failed to materialise after 20 Mar when the Obama Administration announced its plans to buy over toxic assets. Since then, the market is looking for an excuse to continue its downtrend.

Technically, the 3 major indices showed signs of overbought positions. Divergence can also be seen in the RSI and Stochastics.

Today, the Asian markets closed significantly lower on reports that "the Obama administration has forced the departure of General Motors Corp.'s chief executive and suggested a "quick and surgical" bankruptcy for struggling U.S. car makers".

This could be the excuse the market is looking for to continue with its downtrend. As to whether the market will test its March Lows is yet to be seen. At the moment, the immediate target is the March Lows.

At some point today, the DOW futures was negative 200 points. I still have my SPY credit spread which expires tommorrow. I would just need the SPY to drop below $78 upon expiry to fully keep the premium.

The Chinese solar companies unexpectedly jumped last Thursday when it was reported that the Chinese government would subsidise and jump start the solar industries.

I had been playing the covered call on STP (a Chinese Solar Energy play). Such strategy is good for bullish stocks (not very bullish stocks). When the market jumped on Thursday, I closed the April 7.5 Call at a loss. I sold back the April 10 Call after the stock climb much higher. Overall, I still make $$$ as the underlying stock (which I owned) makes much more $$$ than the loss through the April 7.5 Call.

I expect the Chinese Solar stocks to retrace and consolidate its next move. It is likely to move lower with the general market. I would be shorting a naked Put on STP when the time is right.

Cheers !

PersianCat (Millionaire-in-progress)

Monday, March 23, 2009

Selling Naked Put

Someone asked me, "Isn't selling naked options very risky?".

The fact is, buying options is also risky, so is buying/selling shares, playing commodities, futures and forex. The main question should be, "Is it worth the risk and how can I manage the risk?"

I do not encourage any novice traders to sell naked Calls Options. With naked Put Options, it is a different matter. Due to the recent market turmoil, fresh opportunities arise. I have subscribe to to idea of selling naked Put (even to novice traders) provided traders follow certain strict rules. Selling naked Puts is a strategy used by Warren Buffet to collect shares of the stocks that he want to accumulate. Note that he accumulates stocks (a very long term investor) rather than trade stocks.

Selling Naked Put

This is how it works. Lets assume the following:
  • Warren Buffet wants to accumulate more shares in BNI (he actually had bought BNI !).
  • The shares is currently hovering around $55.
  • He wants to buy more shares at $45 or below.
He could just place a buy stop order to buy the shares at $45. However, what he had done before was to sell the Put options, in this assumption, he would place an order to sell the $45 Put for say $6.00. If the share price drops below $45 by the time the options expired, he would have to buy the stock at $45. However, since he already sold the Put for $6, his actual cost of buying the additional shares is only $39 ($45 - $6). Whether it is wise to even buy the stock at $39 is another matter. What matters for him is that he has decided to accumulate more shares of the stock at $39.

If the above Put options expire worthless, he pocket all the $6 that he sold. Either way, he is happy with the transaction.

For novice traders, I have tweaked the above strategy further. I will be sharing the strategy to the next batch of my handholding sessions starting in May 2009. I will show them how to fish as well as giving some fish to start with. The strategy do not stop here. After collecting the shares, we must find ways to effectively maximise our returns. I would then share my trading style in playing the covered Calls. This set of strategies works best for those who want limited but decent profits with limited risk on a monthly basis. It does not require much monitoring - giving me time to invest more time on my Forex plays. When played well, each part of the strategies could generate more than 10% per month !

For March expiry options, I have played STP, selling $7.5 Put for $1.35 and selling $5 Put for $0.60 (played on different days). My $5 Put expired worthless (as such, I keep all the $0.60, a return of about 24% in less than a month, based on a margin of about $2.50).

My $7.5 Put expired in-the-money. As such, I was assigned with 100 shares for every option contract that I sold. However, my breakeven cost is $6.15 (the stock closed at $6.91 on Friday).

I would then play covered Calls on STP.

Cheers !

PersianCat (Millionaire-in-progress)


P.S.
As I write this posting, my intuition says that I should share this set of strategies in detail, separately to non-novice traders. Hmm.... We shall see .....

Friday, March 20, 2009

Triple Witching Day

Today is a Triple Witching Day - "the third Friday of the month that ends each quarter. It marks the simultaneous expiration, at the close, of stock options, index options and index futures." Typically, there is an increase in volatility of the stock market on such a day.

But what is more interesting is that the Triple Witching Day coincided with an overbought market.
  • The DOW Index is now at the 38.2% Fibonacci retracement level and hovering at the Nov 2008 Low level (now become a resistance).
  • The S&P500 Index is now at the 50% Fibonacci retracement level and hovering at the Jan 2009 Low level (now become a resistance).
  • The Nasdaq Composite Index is now at the 61.8% Fibonacci retracement level.
Unless there is good news, it is more likely that the market will close lower today as traders may not want to hold their positions over the weekend and would also like to take profits after a good run.

I have already closed my SPY Bull Put spreads. My naked sold Mar 7.5 and 5.0 Puts for STP are still in play and are performing well so far. I have added GS Puts recently.

Depending on how the market behaves tonight, I might leave a set of fresh Bear Call Spreads expiring 31 March overnight.

Cheers !

PersianCat (Millionaire-in-progress)

Monday, March 16, 2009

Are You An Academician Or Practitioner?

I was watching the re-run of the "Matrix Reloaded" last night. There was scene where the Councillor was talking with Neo about the many things he probably do not know and understand. While he know what some of the machines do (the good things) for them, he do not understand and will never comprehend how it works. Nevertheless, he did not stop the machines from doing what they are supposed to do (e.g. purifying water).

This reminded me of some of my observations in attending courses and in handholding groups of novice traders. In trading, some of the concepts and indicators can be pretty complex to understand. However, what is important is to know how to apply it. Some novice traders are too bogged down trying to understand a concept before they want to apply what they had learned. e.g. some try to understand "Black-Scholes" formula - at the expense of losing the opportunity to make money.

As a car driver, I do not know how the engine of a car really works. But all I need to know to drive a car safely is to know how to use the ABCs (Accelerator, Brake and Clutch) at the right moment. As a trading practitioner, I do not need to remember and know exactly the Black Scholes formula. What is important is to know how to make money from the application of the formula.

As a trading academician, you need to know the formula well, etc. You may even see a compelling need to develop a new indicator or a formula (after years of trading in the market).

So as a novice trader, do you want to be a Trading Practitioner or jump to be a Trading Academician?

I choose to be a Trading Practitioner first (making my money). Whether I want to be a Trading Academician later in life is yet to be seen (not likely for me though). My coaching and handholding sessions are more geared at the practical aspects rather than the academic aspects.

Cheers !

PersianCat (Millionaire-in-progress)

Will The Bear Rally Continue?

The market had a good run closing positive in four consecutive days. What is more significant is that the market closed positive (though not a big positive) last Friday. It means that the market players (not sure the bug ones though - perhaps its the small ones, who would get injured again) are positive about the general market this week, as they left their position opened over the weekend. The comments made by Citigroup's CEO about C on its good results for Jan and Feb this year provided the stimulus for the rest of the market to move foreward. It would be interesting to watch how C and other financial giants (now dwarfted - C market capitalisation is less than DBS Singapore ! ) perform over the next few weeks and months.

Would the market continue with its bear market rally? It seems so though it is likely to take a breather (a slight dip or ends sideways) on Monday and perhaps on Tuesday - unless new bad news are released again.

All my Bull Put credit spreads on my SPY are positive again. My short Puts on STP are also positive. I have added Bull Put credit spreads on SPY based on the quarterly expiry dates.

Cheers !

PersianCat (Millionaire-in-progress)

Wednesday, March 11, 2009

The Bounce Worth Waiting For !

All the three major indices did very well yesterday. It is the bounce I have waiting for. The credit spreads (Bull Put Spreads) that I have been playing on the SPY since the last few days were in the red before yesterday's move. Currently, most of them are back in the black.

Even my sold naked Puts on STP are now either in the black or pass the breakeven point.

With the current price action, I expect the market to go up today and perhaps tommorrow.

Cheers !

PersianCat (Millionaire-in-progress)